Insmed Incorporated's (NASDAQ:INSM) 92% Share Price Surge Not Quite Adding Up

Insmed Incorporated (NASDAQ:INSM) shareholders would be excited to see that the share price has had a great month, posting a 92% gain and recovering from prior weakness. The annual gain comes to 153% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Insmed may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 22.6x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios under 11.4x and even P/S lower than 4x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Insmed

How Has Insmed Performed Recently?

Recent times haven't been great for Insmed as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Insmed will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Insmed?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Insmed's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. Pleasingly, revenue has also lifted 88% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 45% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 209% each year growth forecast for the broader industry.

With this information, we find it concerning that Insmed is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Insmed's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Insmed currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 6 warning signs for Insmed (3 can't be ignored!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.